Use of the net present value criterion in a random job shop where early shipments are forbidden

Abstract

AbstractBoth practitioners and researchers in the field of Operations Management have suggested that shop scheduling should be an integral component in both the strategic and tactical plans for an organization's assets. This paper examines the use of an accepted measure of return on assets, net present value (NPV), in a simulated shop scheduling environment where early shipment of jobs before their due dates is forbidden. In addition, early shipment of raw materials to the shop is also forbidden. This shop environment is consistent with the prevalent practice in industry of accepting orders only on a just‐in‐time basis to reduce purchased parts inventories. The NPV measure provides a means of balancing a variety of performance criteria that have been treated as separate objectives previously, including work‐in‐process inventory, finished goods inventory, mean flow time and mean tardiness, while also providing a means of measuring monetarily the value of various shop scheduling approaches.The NPV performance of priority scheduling rules and order release policies is measured in this research through the simulation of a random job shop under a variety of environmental conditions. It is found in a comparison of priority rules that use time‐based information with those that use job value information that the Critical Ratio rule provides higher average performance than the three other rules used in the study. However, in some situations that are consistent with JIT practice, value‐based priority rules also perform well. The use of a mechanism for delaying the release of jobs to each work center in the shop provided higher average NPV when shop utilization was set at a low level of 80%, while immediate release of work upon its arrival to the shop provided superior performance at a higher shop utilization level of 94%. While JIT materials delivery and costing yields higher NPV, it did not alter the relative ranking of priority rule/release policy combinations. In addition, it was found that environmental factors, including average job length, average number of tasks per job and level of tardiness penalty, resulted in greater variations in NPV performance than the institution of a JIT raw materials delivery policy.